We are already a month into 2019! Can you believe it? Time seems to be flying by. I don’t even know where the last 30 days have gone.
When we left the markets last year, stock prices were falling across the board as recessionary and trade fears kicked in. But much of that has been abated for now. And with the US federal reserve chairman, Jerome Powell, coming out and saying that he won’t raise interest rates as fast as many expect, stock prices began to rally.
Whilst the markets have moved up this month, there were still many attractively priced stocks. Not as many as December but there are still bargains to be had. You always look back at times like these wishing that you could have bought more stock in December when markets were cheap.
That is why I avoid market timing and just make consistent purchases every month.
I know a few people who were selling stocks in December only to buy the same ones now at much higher prices. And they wonder why they get below average returns.
In the stock market, the key is to think rationally. Don’t be swayed by market swings and the heard mentality. Don’t be fooled by the media touting the next recession is just around the corner. After all, it is just noise aimed to distract you from what really matters, building wealth.
When it comes to investing, the hardest part is doing nothing. We all get itchy fingers and just want to trade. But if you look at the best investors in the world – Warren Buffett, Terry Smith, Nick Train – most of the time they are doing nothing.
They can go years without buying or selling a single new stock. They simply let their money compound over time. They know that they can’t time the market. Once they buy into good companies they hardly ever sell. All they do is keep adding to their positions when they have the money. And they let the companies they invest in do the heavy lifting and compound their wealth over time.
As Charlie Munger – billionaire and Warren Buffets business partner once said – “The big money is not in the buying and selling … but in the waiting” .
I personally follow this school of thought. Buy good companies. Buy at attractive valuations. Don’t overtrade. And be patient.
That is why you hardly ever see me selling a stock. If you buy a good company at an attractive price, expect it to do the hard work for you.
This method also helps in eliminating reinvestment risk, i.e. the ever challenging issue of buying undervalued stocks, selling them as they reach fair value, and finding new undervalued assets to reinvest the profits. This can get tiring as you are constantly researching new companies. Rather buy great companies that have the ability to compound your wealth over time.
I will leave you with one last quote from the “Seeking Wisdom From Darwin To Munger” which perfectly illustrates the concept of compounding and the value of patience .
“ If we invest $1,000 with a return of 6% a year, we receive $60 in the first year. If we reinvest that $60, next year we get another $60 from our original $1,000 investment, plus $3.6 from the $60 we reinvested. If we reinvest all our returns, the total value of our original $1,000 investment after 5 years is: $1,000 * 1.06 * 1.06 * 1.06 * 1.06 * 1.06 = $1,338.
Time is the key to compound interest. Over short periods, compounding produces a little extra return. Over long periods, it has an enormous effect. Invest $2,500 each year for 40 years at 10% return and you will be a millionaire “
I am firm believer in the power of compounded returns. The facts don’t lie. The maths makes sense. That is why I put money into the market every month, no matter how small it may be.
Below stocks I bought using my monthly stock purchase programme in January:
- BAT – 9 Shares at £24.80 each. Dividend Income £17.50
- IMB – 9 shares at £23.65 each. Dividend income £16.83
- XPP – 9 shares at £22.40 each. Dividend Income £7.20
In total, these three purchases have added £41.53 in dividend income to my portfolio. Considering my outlay way only £638, I am receiving a dividend yield of 6.50%. This is great for three high quality companies with strong cash flows and well covered dividend payments.
£41.53 may not seem like much in the grand scheme of things. But consistency matters. Adding more and more dividends each and every month makes a difference. To build yourself a dividend machine (LNK), invest regularly. Grow your portfolio.
Looking at my portfolio as whole, it is now expected to generate £3,125 in passive income over the next year. That is £781 a quarter. £260 a month. £6.50 a week. And £9.30 a day.
These numbers have certainly helped me get over the January blues.
This just goes to show the power of small amounts. In 2015, I only made £30 odd in dividend income. Today, I make that same amount every 4 days.
So if you are just starting out or in the early stages of your journey, stay the course. Your motivation for saving and investing will grow when you start to see the results. I am now more motivated than ever as I can see tangible results in the form of my dividend income. I can’t wait to hit milestone after milestone. And ultimately, I can’t wait to be financial free.